Arch Capital Is Maintained at Buy by Roth Capital

Andrew Bary

Billionaire investor Bill Ackman may seek to sell a new equity-oriented closed-end fund in early 2026 with an unusual inducement to buyers — a piece of his investment management company.

The Wall Street Journal reported recently that Ackman might give away as much as 10% of his firm to buyers of the closed-end fund, Pershing Square USA, after failing to take public the fund in 2024 without any such bonus.

Initial public offerings for the closed-end fund and the management company, Pershing Square Capital Management, could come simultaneously, the WSJ reported. Details are sparse: there have been no securities filings for either deal.

Such a transaction probably would be a first for the closed-end fund market and a rare instance of buyers of an IPO getting stock in a related company as a bonus.

Ackman's potential move reflects tough conditions in the market for closed-end funds. The $250 billion U.S. closed-end market is moribund with virtually no issuance in recent years. The problems involve the structure of closed-end funds, and the growing investor preference for exchange-traded funds, or ETFs,

Closed-end funds are issued at a fixed price and then trade on an exchange, usually the New York Stock Exchange or Nasdaq. They can then change hands at a premium or discount to their net asset value. Most trade at discounts.

A major reason that Ackman, 59, was unsuccessful in bringing public Pershing Square USA in 2024 was that investors were afraid it would do the same, resulting in losses.

Ackman's existing closed-end fund, Pershing Square Holdings, which trades in London, has traded at an average discount of close to 30% over the past few years. The recent discount was just over 25%.

Ackman is hoping he will be successful on a second try with the U.S. closed-end fund. When the fund offering was shelved in the summer of 2024, Ackman wrote: "We will report back once we are ready to launch a revised transaction."

Besides the management-fund inducement, he is banking on his star power and the strong performance of his European closed-end fund, Pershing Square Holdings, over the past six years. It also trades over-the-counter in the U.S. under the ticker PSHZF.

That fund, which reports its results weekly, was up 17% year to date after fees through Nov. 18, about four percentage points above the S&P 500. The concentrated equity-oriented fund holds such stocks as Alphabet, Uber Technologies, Brookfield, and Amazon.com.

Bringing public a sizable closed-end equity fund would be a win. Not only would it would result in lucrative fee income to his management company, it would count as what the industry calls "permanent capital." Investors tend to value that at a high multiple of earnings, which would be a positive for Pershing Square Capital Management.

The management company was valued at $10.5 billion in June 2024, when Ackman sold a 10% stake to a group of investors including insurer Arch Capital Group. The Journal reported that in an IPO, the management company could be valued at "well over" that amount.

Every alternative manager from Blackstone to Blue Owl is eager to bring in permanent capital in one form or another.

Ackman is very familiar with the closed-end fund market. He runs an estimated $18 billion of fee-paying investment funds, most of it in Pershing Square Holdings.

Ackman's calculus may be that it is worth giving away as much as 10% of his management company, as the Journal reported, to achieve that greater value. Here's how it could work. An investor buying the new Ackman closed-end fund at, say, $100 a share, might get $10 or more a share in value of the management company.

That could address concern that the new fund will trade at a discount. Even if the new fund traded down to $95 from $100 in our theoretical example, the investor would still come out ahead because of the $10 a share in the management company.

Management fees would make it pay off for Ackman. The famed investor had planned to charge a lush 2% annual management fee when he sought to bring public Pershing Square USA in 2024.

If the fee is the same in a revamped offering, it could result in a lucrative income stream to his management company depending on the size of the closed-end fund. Every $1 billion of new assets would mean $20 million of annual fee income.

Ackman probably could easily sell a Pershing Square ETF in the hot ETF market but that would offer him less flexibility to make long-term investments. It wouldn't offer a source of permanent capital and wouldn't be as valuable to his management company.

Ackman found out the hard way in July 2024 that it's tough to bring public a new closed-end fund. The deal was shelved after the proposed size was reduced to $2.5 billion to $4 billion, compared with the potential $25 billion that was initially said to be the target size.

Closed-end funds tend to trade at discounts from their net asset values because fees can be high and there generally is no mechanism for investors to redeem shares at NAV. ETFs, meanwhile, generally trade very close to their NAVs.

Activist investors have taken aim at existing closed-end funds to turn them into open-end funds that would trade at NAV.

Given that climate, an IPO of the Ackman fund is no sure thing, even with a management-company inducement.

Write to Andrew Bary at andrew.bary@barrons.com

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